1. William Easterly in his book ‘The Elusive Quest for Growth’ described the Solow’s growth theory as a ‘shocker’. Discuss why the Solow’s growth model was surprising. Which policy implication of the Solow model was surprising and how did Solow arrive at this policy implication?
- Using the Solow growth model, discuss the likely impact of the following changes on the level of Canadian output per worker in the long run (that is steady state):
- The government of Canada has introduced a Tax Free Saving Account legislation that allows Canadians to open up a savings account that is sheltered from income tax.
- Canadian female participation (but constant population) is expected to continuously increase in the coming years.
- Suppose that the production function of a country is given by
Y=AKaL1-a, where A is the techonology parameter, L is labour, and K is capital.
- Show that the production function exhibts constant returns to scale.
- Are there decreasing returns to capital? (hint: MPK= aAKa-1L1-a)
- Derive the equation for steady state output per worker and steady state consumption per worker in terms of the saving rate (s), the technology parameter (A), and depreciation rate (d).
- Suppose that d = 0.05, a = 0.5, and A = 1. With your favourite spreadsheet software, compute steady state output per worker and consumption per worker for s = 0.1, 0.2, …1.
- Based on (d) above graph the steady state consumption per worker and output perworker against saving (saving on the horizontal axis). Is there a saving rate that maximizes steady state consumption per worker?